Investing in and for social change

By Cirilo P. Noel

First Published in Business World (12/23/2013)

MORE than a month after the phenomenal damage wrought by super typhoon Yolanda, relief efforts continue for the thousands upon thousands of survivors who lost their homes and livelihoods. It goes without saying that rebuilding communities will be a long and uphill challenge, but with the generous response of local and global donors and the focused efforts of national and local government, we are assuaged that this, too, shall come to pass.

Providing the immediate needs of food, shelter and medical supplies has been the obvious first step. Traumatized victims are also being counseled; displaced families, reunited; and broken infrastructure, reconstructed. With all this happening, it is a golden moment for entrepreneurs to play a significant role now and in the long term. Specifically, the situation offers an opportunity for social entrepreneurs to flourish.

Traditional entrepreneurs have been cited as drivers of the economy in that they provide jobs; their products and services contribute to a dynamic market place. Most of the time, however, they are driven primarily by profit. More and more, entrepreneurs are realizing the need for civic and social involvement, resulting in corporate social responsibility programs. While CSR is a noble undertaking, it is but an offshoot and not a primary reason for the enterprise’s existence. In such a set-up, the entrepreneur nurtures an inclusive or socially responsible corporate culture, which is commendable, but at the end of the day, the motivation is still profit.

On the other hand, there are social enterprises created for both profit and a social mission with measurable impact on their stakeholders. These businesses are founded and managed by social entrepreneurs and do not rely solely on unpredictable philanthropic grants. A social enterprise is positioned somewhere between a conventional business that is singularly focused on profit maximization and the typical non-profit entity that only provides social benefits. While social enterprises may be structured as non-profits, they employ business methods to achieve sustainability.

By definition, social entrepreneurs are individuals who apply a practical, innovative and market-oriented approach to their business — someone who has created products and services that address the challenges faced by communities, help solve complex problems, and benefit the marginalized and the poor. Social entrepreneurs bring about social change.

There are several areas where social entrepreneurs are committed. These include health, enterprise development, the environment, microfinance, technology, water/sanitation, education, homelessness and housing, communication/media, rural development, fair trade and labor conditions, among others.

According to the Geneva-based Schwab Foundation for Social Entrepreneurship, there are at least three models of organizations that may be considered social enterprises.

First is the leveraged not-for-profit organization. This type of organization involves a cross-section of society, including private and public organizations as well as volunteers that drive forward innovation through a multiplier effect. The organization depends almost entirely on outside funding (e.g., donations and grants) for its survival. Its long-term sustainability is enhanced mainly because of the commitment of various players to the vision and objectives of the organization. Certain foundations and non-government organizations fall under this cluster.

The second social enterprise model is the hybrid not-for-profit. It includes some degree of cost recovery through the sale of goods or services to a number of participating institutions (public and private) as well as to target population groupings (e.g. women, farmers, etc.). However, to fully sustain its transformational activities and address the needs of clients (most of whom are poor or otherwise marginalized in society), the organization mobilizes other sources of funds from the public or philanthropic sector. These other sources of funds may be in the form of loans or grants. Some microfinance institutions and cooperatives operate under this model.

Increasingly being noticed is the third social enterprise model, the hybrid for-profit, a business that drives transformational change. While profits are generated, the main aim is not to maximize financial returns for shareholders but to grow the social venture and more effectively reach people in need. Wealth accumulation is not a priority; instead, profits are reinvested in the enterprise in order to fund expansion. Investors in this type of organization are interested in combining financial and social returns on their investment. This is what is now referred to as “impact investing.”

Impact investing adopts a double bottom line approach — the return on investment and the social impact of the business are equally important. The investor expects the business to generate financial returns and a measurable positive impact. In fact, the social impact should be part of the enterprise’s business strategy and used in assessing its success or failure. It must be emphasized that the financial input is an investment and not charity.

This is an entrepreneurial paradigm that is gaining momentum and what may eventually be the business model that can help alleviate poverty and equalize Philippine society. In the past 10 years that the SGV Foundation has been involved with the Entrepreneur Of The Year Philippines program, it has recognized a number of social entrepreneurs whose business activities are transforming lives. Together with the Schwab Foundation for Social Entrepreneurship, the Entrepreneur Of The Year Philippines has identified Filipino game changers who are carving a niche not only in the local business community, but who are also gaining recognition in the international social enterprise space. It is to the benefit of our country that their tribe increase.

When the debris caused by the natural calamities has finally been cleared and the furious rebuilding of communities begins, entrepreneurs are expected to be a big part of the action. Given the breadth of despair and the depth of poverty involved, it may be an apropos moment for investors to put their money — and their hearts — into a social enterprise. The financial returns may be nominal, but the social gains will be life-changing. Through the passion of social entrepreneurs, we may yet see a viable solution to economic inequity.

On behalf of the contributing writers of this column and SGV & Co., we wish you, our Suits the C-Suite readers, a most blessed Christmas and a promising New Year.

Cirilo P. Noel is the chairman and managing partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.